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Carillion crisis looms for government as time runs out for refinancing deal

Carillion continued to get public sector work even after significant profit warning was issued.Photograph: Darren Staples/Reuters

The crisis at Carillion threatens to engulf the government as opposition parties question the decision to continue awarding public sector contracts to the services and construction giant when ministers knew it was in trouble.

Whitehall departments are holding emergency meetings this weekend to discuss contingency plans if the Wolverhampton-based firm, which is integral to a raft of public infrastructure projects including HS2 and several major road schemes, is forced into administration.

Reports that the company’s proposed plan to turn around its fortunes has been rejected outright by stakeholders, which include three leading banks – Barclays, HSBC and Santander UK, have been played down.

However, time is running out for a deal to be struck and there are claims that Carillion could be placed in the hands of administrators Ernst & Young as early as Monday.

Such a move would raise serious questions about a raft of government contracts awarded to Carillion.

“It has been clear for months that Carillion has been in difficulty but the government has continued to hand over contracts to the company even after profits warnings were issued,” said MP Jon Trickett, Labour’s shadow Cabinet Office minister.

“Jobs and public services are now at risk because the Tories were blinded by their commitment to a failing ideological project of introducing the profit motive into taxpayer-funded services. Labour urges the government to stand ready to intervene and bring these crucial public sector contracts back in-house in order to protect Carillion’s employees, pension holders and British taxpayers.”

Chris Grayling, the transport secretary, is facing the most pressure. Last year, his department awarded a consortium, which included Carillion, a share of contracts for the HS2 line, just a week after the company issued a shock profit warning that marked the start of its crisis.

At the time, Grayling said he had been given “secure undertakings” from the company.

Whitehall insiders stressed that the HS2 contracts had been “stress tested” to ensure that if one contractor pulled out, others in the consortium were able to fill the gap.

But Andrew Adonis, the former chair of the government’s national infrastructure committee, said: “It looks as if Chris Grayling may have been bailing out Carillion as well as Virgin. They got HS2 contracts from him after their troubles emerged in the summer, raising big questions about his due diligence and judgment.”

Carillion, which has debts of about £1.5bn and a pension fund shortfall of almost £600m, is proposing that the banks swap their debts for majority equity stakes in the business.

But a more urgent sticking point, the Observer understands, is the need for a £300m cash injection to keep the business afloat. With the banks balking at stumping up more cash, there is speculation that the government may have to step in to guarantee Carillion’s short term future.

The Lib Dem leader, Vince Cable, rejected such a move: “The government can’t just do a financial bailout. The shareholders and the creditors – the big banks – have got to take a hit, they can’t just offload all of the losses on to the taxpayer.”

The company, which employs 43,000 people globally, is Highways England’s second-biggest supplier by value of contracts, according to Construction News. The firm is also Network Rail’s second-largest contractor, winning work worth £372m last year.

Rachel Reeves, the Labour MP who chairs the business select committee, called on the government to make a Commons statement on Monday.

“They need to explain what they knew and when, as well as what they are going to do now to protect jobs, public services, crucial infrastructure investment – but also taxpayers,” she said.

“I don’t think that taxpayers’ money should be used to prop it up. Investors have known for some time of the difficulties here. Taxpayers should not have to bail out this company.”

Several government agencies rallied to the company’s defence on Saturday.

A Network Rail spokesman said: “Carillion is a good supplier to Network Rail and has a number of contracts across the country. Carillion’s delivery performance is strong and we enjoy an open, honest and constructive relationship.”

David Poole, executive director for procurement and commercial, Highways England, said the company was “delivering a number of key projects in our major project portfolio”.

Last year Carillion had sales of £5.2bn and was valued at almost £1bn. But since then its share price has plummeted and it is now worth around £60m. Experts said it is paying the price for overreaching itself.

A government spokeswoman said: “The company has kept us informed of the steps it is taking to restructure the business. We remain supportive of their discussions with their stakeholders and await future updates on their progress.”